OPTIMAL TAXATION ON MIXED DIAMOND GOODS: IMPLICATIONS FOR PRIVATE CAR OWNERSHIP IN CHINA

Abstract. The ‘diamond effect’ exists when a consumer's utility depends on the exchange value, not just on the intrinsic consumption effects of the good. Yew‐Kwang Ng has discussed the optimal tax on a pure ‘diamond’ good. This paper extends Ng's model to cover mixed diamond goods. It uses three mathematical models to show that the optimal tax on a mixed diamond good with both intrinsic and diamond effects depends on the proportion of the diamond effect. The result may explain the violation of the Ramsey Rule in practice, and may be used to formulate private car taxes in China.     

Relative Consumption Concerns and the Optimal Tax Mix

This paper studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two‐type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a nonpositional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.     

Voting and paying for public goods: An application of the theory of the core

Let any coalition with a majority of all voters have the power to choose the quantities of public goods. Under Rule I a majority coalition bears a cost of its decision that is proportional to its size. Under Rule II it must bear the whole cost of its decision. Thus, Rule I imposes costs on minorities although they have no power to choose the quantities of public goods while Rule II allows goods to have some attributes of semiprivate goods. It is shown that a nonempty core under Rule I implies a nonempty core under Rule II, but not conversely. Necessary and sufficient conditions in terms of the properties of the von Neumann-Morgenstern characteristic function are given.     

Ad‐valorem tax incidence and after‐tax price adjustments: evidence from Brazilian basic basket food

Abstract Recent empirical work on tax incidence suggests that after‐tax price responses are independent of the tax change direction. This paper investigates asymmetric price responses to ad‐valorem tax changes in the Brazilian food market for 10 goods in 16 states during the period 1994–2008. Our results suggest that when tax rates increase, tax full shifting occurs for 2 of the 10 goods and tax overshifting occurs for one of the 10 goods; the price response to tax cuts is an undershifting for all goods. Moreover, this last result is similar to our estimation of (average) tax incidence (undershifting). We also investigate the short‐term and long‐term relationships between prices and VAT rate parameters and find that prices seem to respond to tax shocks within four months.     

Environmental taxes with heterogeneous consumers: an application to energy consumption in France

This paper constructs a model with four groups of households who have preferences over labor supply, consumption of polluting (energy related) and non-polluting (non-energy) goods, and emissions. It quantifies the model for the French economy and computes its optimal tax equilibria under nine second-best tax regimes. We find that the redistributive role of environmental taxes requires the polluting goods to be taxed at a rate much below their marginal social damage. These goods may even require an outright subsidy if the society values equality ‘a lot’. Secondly, if environmental taxes that have an exclusively externality-correcting role, they benefit all types—although the gains are rather modest. The gains and losses become more substantial when environmental taxes have a redistributive role as well. Third, setting the environmental tax at its Pigouvian level, rather than its optimal externality-correcting-cum-redistributive level, benefits the high-income group at the expense of the low-income groups. Fourth, nonlinear taxation of polluting goods, and nonlinear commodity taxation in general, is a powerful redistributive mechanism. Fifth, introducing environmental taxes in the current French tax system, with its suboptimal income taxes, results in substantial welfare gains for the highest income group and a sizable loss for the least well-off persons.     

A Characteristics Approach to Optimal Taxation: Line Drawing and Tax‐Driven Product Innovation

Real‐world tax legislation assigns goods to different categories of tax rates on the basis of observable characteristics, allowing the tax system to handle a constantly evolving set of available goods. We recast the theory of optimal taxation in the language of characteristics, and we show how to optimally draw lines that delineate tax‐rate regimes. Such lines are associated with notches in tax liability as a function of characteristics, creating incentives to introduce goods with new combinations of characteristics in order to reduce tax liability. With a restricted set of tax instruments, such notches are in general part of the second‐best optimal tax system.     

Green monetary and fiscal policies: The role of consumer preferences

We establish a two-sector model to simulate the potential effects of green fiscal poli- cies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as a carbon tax, an implicit tax on brown loans, and a subsidy for the purchase of green goods are all beneficial to the green sector, in contrast to green quantitative easing. A carbon tax imposed directly on firms in the brown sector is the most effective tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to purchase more green goods as an increasing part of their consumption basket. Furthermore, the effects of those green policies are more effective when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers’ awareness and ability to consume green goods reinforce the effectiveness of public policies designed for low-carbon transition of the economy.     

Trading Taxes vs. Paying Taxes to Value and Finance Public Environmental Goods

The potential sensitivity of environmentalresource valuation to payment vehicles is ofinterest to researchers and decision-makersinvolved in estimating and applying thesenumbers. A conceptual model is developed whichprovides insight into how the different paymentvehicles of a special tax and a taxreallocation affects the willingness to pay(WTP) for environmental goods. Hypothesistesting using contingent valuation datasuggests WTP with a tax reallocation is higherthan WTP with a special tax for ground waterquality protection in Georgia and Maine, USA.Technical measurement and welfare analysisimplications and limitations of valuing andfinancing public environmental goods using taxrealloactions are discussed.     

RAMSEY TAXES MEET PRICE RIGIDITY

‘Ramsey taxes’ are commodity taxes that minimize deadweight loss. Evidence has shown dramatic differences in the extent of price rigidity across goods: while the prices of some goods change frequently, the prices of other goods seldom change. This paper examines Ramsey taxes in the presence of heterogeneous price rigidity. We find that, to minimize deadweight loss, lower (higher) tax rates should be imposed on goods with rigid prices if their relative prices are too high (low) relative to the would‐be situation of no price stickiness. Intuitively, Ramsey taxes remedy the relative price distortion caused by the price rigidity of some goods. We calibrate our model to data from Taiwan and the USA, showing a significant cut in welfare cost if Ramsey rather than uniform taxes are applied.     

Optimal labor income taxation in a two-sector dynamic general equilibrium model

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive.     

Uncertainty, Commitment, and Optimal Taxation

This paper examines the optimal tax design problem in the presence of wage uncertainty. The wage has a continuous distribution, individuals are ex ante identical, preferences are separable in labor supply and goods, public policy aims at providing the population with social insurance, and the only restriction on the tax instruments is that emanating from lack of public observability of realized wages and labor supplies. We show that optimal tax structures depend crucially on whether it is labor supply or goods that consumers have to commit to before the resolution of uncertainty. Specifically, we prove that, in the absence of commitment, the social insurance problem collapses to the traditional optimal tax problem. Second, if labor supply is precommitted, it would be possible to effect a first-best outcome. Third, commitment to goods would make indirect taxation a useful instrument of tax policy even in the presence of a general income tax; it requires differential tax treatment of committed and noncommitted goods. Finally, if preferences are separable between the two types of goods, precommitted goods must be taxed at a uniform rate lower than that on the noncommitted goods.     

A case for taxing charitable donations

We develop a model that allows for public goods and status signaling through charitable contributions. We use this setup to re-examine the conventional practice of rendering a favorable tax treatment to charitable contributions.     

Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods

The fact that raising taxes can increase taxed labor supply through income effects is frequently and erroneously used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive measures of the marginal benefits of public goods and the Marginal Cost of Funds (MCF) using both compensated and uncompensated measures. We confirm that the desirability of tax‐financed public projects is independent of the method used. An important innovation is to show that the benefits of public goods must be adjusted by a benefit multiplier not previously seen in the literature if an uncompensated MCF is used.     

Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.     

OPTIMAL CAPITAL TAXES FOR PUBLIC GOOD PROVISION*

This paper constructs a general equilibrium trade model of a small open economy that produces many traded private goods and one non-traded public consumption good. Trade in goods is free, but the country taxes the internationally mobile capital to finance the provision of the public good. Within this framework, the paper identifies the conditions under which the optimal policy on the internationally mobile capital calls for a tax. Under the assumptions that (i) the welfare function is concave with respect to the tax rate, and (ii) the net revenue-maximizing capital tax rate is positive, it is shown that the marginal cost of the public good always understates its social marginal cost.     

Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods

The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects' work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.     

Optimal Taxation in Life-Cycle Economies

We use a very standard life-cycle growth model, in which individuals have a labor-leisure choice in each period of their lives, to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income. The intuition for our result is straightforward. In a life-cycle model the individual's optimal consumption-work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual's lifetime. One way to achieve this goal is to use capital and labor income taxes that vary with age. If tax rates cannot be conditioned on age, a nonzero tax on capital income is also optimal, as it can (imperfectly) mimic age-conditioned consumption and labor income tax rates. Journal of Economic Literature Classification Numbers: E62, H21.     

A Simple Model of Commodity Taxation and Cross-border Shopping

This paper sets up a simple model in which two countries, differing in geographical extent, engage in commodity tax competition originating in opportunities for cross-border shopping. The non-cooperative tax equilibrium and various coordination initiatives are examined in the benchmark model and in two model extensions incorporating (i) costs of transportation for goods and (ii) border inspection. Among the more surprising results are the following: with (i), pure profits accrue to sellers near the border, but subjecting them to tax may lower the country's total tax revenue; with (ii), the volume of cross-border shopping may well increase.
JEL classification : H 20; H 87; H 26     

Optimal grouping of commodities for indirect taxation

Indirect taxes contribute to a sizeable part of government revenues around the world. Typically there are few different tax rates, and the goods are partitioned into classes associated with each rate. The present paper studies how to group the goods in these few classes. We take as given the number of tax rates and study the optimal aggregation (or classification) of commodities of the fiscal authority in a second best setup. The results are illustrated on data from the United Kingdom.     

Who Pays a Price on Carbon?

We use the 2003 Consumer Expenditure Survey and emissions estimates from an input-output model based on the 1997 US economy to estimate the incidence of a price on carbon induced by a cap-and-trade program or carbon tax in the context of the US. We present results on how much different income deciles pay for a carbon tax as well as which industries see the largest increase in costs due to a carbon tax. We illustrate the main determinant of the regressivity: consumption patterns for energy-intensive goods. Furthermore, on a per-capita basis a carbon price is much more regressive than calculations at the household level. We discuss policy options to offset the adverse distributional effects of a carbon emissions policy.